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Continental European initial public offerings’ valuations are set to return to more attractive levels after a spate of pulled flotations, says Mark Denham.

Key points

Pricey valuations and global growth fears have prompted a spate of initial public offerings (IPOs) to be pulled recently

The surge in biotech and technology offerings is not a re-run of the ‘dot-com’ boom of the 1990s

We hope bankers get the message that valuations need to be realistic and businesses financially sound

The outlook for European shares and IPOs in 2016 is encouraging

Discerning investors will look for those deals offering genuine long-term value and avoid more suspect ones

After a strong run of initial public offerings (IPOs) in continental Europe during the first half of the year, several were pulled in recent months as unrealistic company valuations and earnings expectations dampened demand. As more attractive investment opportunities start to emerge again and the prospect of further monetary policy easing boosts the appeal of shares in the region, IPOs will become more popular. Discerning investors will look for deals offering genuine long-term value and avoid more suspect ones.

Lull in activity

A slowing Chinese economy and fears over biotech share valuations have been among factors leading to more bearish sentiment since the summer. Indeed, UK-based Shield Therapeutics and German building materials group Xella were among a host of offerings pulled, especially in the healthcare sector, in this period.

Attractive long-term investment opportunities were far tougher to find in the third quarter as valuations were increasingly unrealistic and many loss-making businesses tried to list. For instance, French music-streaming business Deezer, a rival to Spotify, tried to float while not expecting to turn a profit until 2019.

Reality check

Despite the recent lull in activity, IPO volumes remain relatively strong with €35.7 billion1 (£25.3 billion) raised from European flotations in the first nine months of 2015. Volumes were down only 11 per cent on the first nine months of 2014, a year when the value of deals was the highest since 20071.

We hope bankers will get the message that IPO valuations need to be realistic and only those businesses that are ready to float are brought to market. Sentiment has improved in recent weeks, with European shares recording their strongest monthly gains in October since July 2009 and euro-zone central bankers raising hopes of further policy easing. However, investors are keeping the pressure on issuers. For instance, the IPO of continental Europe’s largest asset manager, Amundi, is expected to price towards the bottom of the range given by the syndicate bankers when it floats later in November.

Upbeat earnings prospects

The third-quarter continental European earnings season has been mixed. However, earnings in the region look set to grow by between five per cent and seven per cent in 2015 and then accelerate to around ten in 2016 as economic output in the area expands modestly.

Continental European equities are likely to remain around current levels this year before appreciating in 2016, aided by stronger company profits and domestic monetary policy that is far more likely to be eased than tightened. The outlook is encouraging for European healthcare businesses, including biotechnology, despite their strong rally of recent years. These companies should continue to profit from an explosion in innovation, more efficient research and development and regulatory attempts to quicken drug approval procedures. As ‘animal spirits’ return, so the potential to add value to portfolios from well-priced IPOs is set to improve. We doubt this is a re-run of the ‘dot-com’ boom of the 1990s.

Important Information

Unless stated otherwise, any sources of all information is Aviva Investors Global Services “Aviva Investors”) Limited as at 12 November 2015. Unless stated otherwise any views and opinions expressed are those of the author and should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority and a member of the Investment Association.

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This document is intended for distribution only to Persons of a type specified in the DFSA’s Rules “Professional Clients” and must not, therefore, be delivered to, or relied on by, any other type of Person. This document is for the exclusive use of the persons to whom it is addressed and in connection with the subject matter contained therein. This communication is distributed in the DIFC by Aviva Investors Global Services Limited Regulated by the Dubai Financial Services Authority as a Representative Office with its address at Office 108, Al Fattan Currency House, DIFC, Dubai, UAE, and entered on the DFSA register under Firm Reference number F001481. The Dubai Financial Services Authority has no responsibility for reviewing or verifying this presentation The Dubai Financial Services Authority has not approved this presentation nor taken steps to verify the information set out in it, and has no responsibility for it. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London EC3P 3DQ. Telephone calls may be recorded for training and monitoring purposes.

Mark Denham

Head of Pan European Equities

Main responsibilities

Mark manages the European equity team in London and Poland. He is the lead portfolio manager on Aviva Investors European equity life and pension funds and the Aviva Investors European Equity Fund (both OIEC and SICAV).
Mark is an Aviva Investors Responsible Investment Officer (RIO) ensuring environmental, social and governance (ESG) issues are integrated into the investment process.

Experience and qualifications

Mark has significant experience in investment management and joined Aviva Investors in October 2003 from Insight Investment where he was a European fund manager, and prior to this at National Mutual Life.
Mark holds MA (Hons) in Natural Sciences from Cambridge University and is a Fellow of Institute of Actuaries.